Five things ABI members should know about the OFT workplace pension market study

19/09/2013

The aim of the market study was to examine whether, in light of auto-enrolment, competition is capable of driving value for money and good outcomes for scheme members. The OFT have concluded that this is not the case due to weaknesses on the buyer side of the market and the complexity of the products.

1. Improving scheme governance

The ABI and its members have agreed the introduction of Independent Governance Committees (IGC) which will be embedded in all providers of contract based pensions and bundled trust based schemes (section 1.32 of the report). The purpose of the IGC is to identify situations where scheme members are getting poor value for money, and implement changes to the pension product as a result (1.34). The IGC will:

Have a majority of independent members and an independent chair

Consider all the key elements of the value for money of schemes

Report a proposed action to the pension provider’s Board if a problem is identified. The Board will have a “comply or explain” duty to act on these recommendations. If the Board fails to act on these recommendations in a way that satisfies the IGC, the IGC will have the power to make the matter public, to inform the employee and employer and to escalate the matter to the relevant regulator.

While the OFT noted the ABI’s suggestion that smaller companies may choose to employ an independent governing person or firm in place of an IGC, they have not taken a position on this proposal (footnote 5, p. 23).

The OFT recommend that the key elements of this governance solution should be embedded by the Government into a minimum governance standard that will apply to all pension schemes (1.33).

2. Improving the quality of information available

Building on the ABI’s Agreement on the Disclosure of Pension Charges, the OFT recommends that all charges associated with pension schemes, including those associated with investment management, should be disclosed in a framework that will allow employers to compare a commonly defined single charge (1.36).

Investment management transaction costs should be omitted from this single charge. These costs should be transparently reported and made available to the IGC’s who will be best placed to make an informed decision on whether they represent value for money. OFT recommend that the FCA undertake work to agree a consistent methodology for reporting comparable information on transaction costs and portfolio turnover rate as part of its planned competition review of wholesale markets (1.37).

DWP should consider mandating that information about the key elements of scheme quality – such as scheme administration standards, past investment performance and the quality of the provider’s governance standards – must be provided to employers in a comparable format by all providers of AE schemes where no intermediary is involved, building on the joint Industry Pension Charges Made Clear Code of Conduct (1.38).

3. Ending the current risks to consumer detriment

The ABI and its members have agreed to carry out an audit of all workplace pension products sold pre-2001 and all post-2001 workplace pension products with charges over an equivalent of 1% AMC by the end of December 2014. This audit will be overseen by a Project Board with an independent chair and representatives from DWP, regulators, the industry and the OFT (1.39).

OFT considered a charge cap for legacy schemes but concluded that the audit process is preferable, given that some schemes may offer value for money benefits such as GARs, defining a charge that captures all configurations would be difficult, and charge caps can create a risk of unintended consequences. OFT state that they would not rule out a charge cap, but it should be considered in full knowledge of the different charges and benefits that apply in the market and of the risks that a cap may entail (1.40).

For trust-based schemes, OFT recommends that TPR should:

Set out how trustees can assess the key element of value for money

Require each trust-based scheme to report basic data to TPR on the results of this assessment

Integrate this data with their risk framework and make an assessment of which schemes are at greatest risk

Carry out an exercise to establish the key barriers to closing occupational schemes that offer poor value for money and transferring member’s assets to alternative schemes (1.42)

Government should consider whether there is potential to put greater onus on trustees to prove their compliance with value for money standards, whether the enforcement powers currently available to TPR are sufficient, and whether any barriers to closing trust based schemes should be addressed (1.43).

4. Preventing detriment to pension scheme members in the future

The OFT recommend that:

AMDs be banned such that employees who stop contributing to a DC workplace scheme should not be penalised in respect of the charges they pay in comparison to those scheme members that continue to actively contribute. In addition, employees who are converted into an IPP instead of being classified as a deferred member should also not be penalised in respect of the charges they pay (1.44)

The OFT’s rationale for banning AMDs are set out in 6.15 – 6.17 (from p. 106): many scheme members may be unaware of their charges rising; and employers have no incentives to limit the charges on ex-employees

Schemes containing adviser commissions should not be used for employees who are automatically enrolled in the future (1.44). This is because the existence of such schemes creates a barrier to switching as advisers would lose the commission stream if they advised the employer to switch (9.30)

Master trust schemes should demonstrate to TPR that they can deliver ongoing value for money for members on the basis of realistic growth plans and contingencies (1.45). Government and regulators should aim to ensure an equivalent level of protection between master trust products and contract based products (1.46)

Given these initiatives and recommendations, the OFT have concluded that a referral to the Competition Commission would not be appropriate. The OFT are consulting on this provisional decision until 31 October – this is standard procedure for all OFT market studies.

5. Next Steps

The ABI will begin discussions with the OFT next week to discuss the recommendations contained in the report, as well as to clarify the industry’s position on certain aspects of the agreed initiatives, including the scope of the audit and roles of the IGC and Project Board.

We will keep the ABI’s OFT Working Group as well as other relevant committees informed on these discussions.